International Game Technology PLC (IGT) 2006 Q1 法說會逐字稿

Good afternoon, this is the [Carlsgrove] conference operator. Good afternoon, and thank you for joining Lottomatica's fourth quarter 2006 results conference call.

[OPERATOR INSTRUCTIONS].

At this time, I would like to turn the conference over to Mr. Fabio Celadon, Finance Director of Lottomatica. Please go ahead, sir.

Thank you. First of all, I would like to apologize for the delay and for having postponed the conference call. And I would like to thank all attendees for being so patient. The board directors today went through a very lengthy session, approving several resolutions that you will probably seen or that you will have seen from the lengthy press release that we just issued.

I will very briefly go over the first quarter financial results of Lottomatica, and then I will give you a brief overview of what else the board directors have approved. As to the first quarter key highlights, the first thing to notice is that [lotto winnings] are in line with Q1 2004. Of course, if we compare them to Q1 2005, 2005 in Q1 was still benefiting from the late number 53, so the comparison is not appropriate.

As to the decrees, the correspondent decrees in Lotto revenues vis-à-vis 2005, that was offset by the strong performance that we continue to record on the instant side of things, and also on the services segment. We then approved in the - the AGM in April approved a dividend of EUR1.3 per share. This has been paid today, and in terms of the transaction update on the GTECH side, today the board directors also approved the issuance of EUR750 million in hybrid bonds.

The launch of the transaction is going to be in the next few days, most likely. Today the board directors also approved fiscal year 2005 pro forma consolidated financial accounts as if the transaction for the acquisition of GTECH had been consummated in 2005 and that's also another building block of our - of the execution of all the financing streams for the acquisition of GTECH.

In terms of the highlights on the business side, we mentioned that Lotto performance is in line with our expectations. Instant tickets are going very well. In Q1 '06, we traveled the results of Q1 '05, the price point and the average price per ticket has gone up meaningfully and continues to reflect a very good performance on the higher priced ticket.

This also allows for a meaningful improvement in terms of margins, as this flows through EBITDA and cash flow directly. The EUR5 ticket, immediate value, continues to perform very well, and also the new lottery, [Medalia d'Oro], which was launched in relation to the 2006 Winter Olympic Games, performed very well.

As to the services business - sorry, I'm told that the presentation is now available on the Web if any of you want to access that, it's going to make it easier for you to follow.

Going back to the presentation, services business enjoyed significant growth, with revenues up 28% year on year, and EBITDA 48% year on year. The prepaid mobile top-ups are performing very well.

We processed around 53 million electronic top-up transactions in Q1, which compares with 48 million in the same period in 2005. We also continued to roll out the [standeries] business, and that is performing very well. The improvement in Q1 also comes from the utility bills payment service, which after struggling a little bit last year is now performing in line with expectations.

If we now look at the highlights, revenues and EBITDA, revenues are exactly in line with Q1 '05. We recorded in Q1 '06 EUR190 million, which compares with 189 million in the same period last year, so exactly the same revenue performance, even though the Lotto collection was down 15%, and given the fact that we are in Q1, the [deglage] impact is not plain in its effect yet, so revenues were down 15% as well.

That was, as you can see, completely offset and made up for by strong performance in the instant tickets and in the services business. As for EBITDA, a slight decrease, 4% less than last year, recording EBITDA of 112 million vis-à-vis 116 million last year, with an EBITDA margin of 58.8%. That compares with 61.7% last year.

Now, that EBITDA margin is of course not meaningful, as it reflects the higher fee rate that in the first few months of the year we benefit from on the Lotto business. We provide also some normalized EBITDA numbers and margins just for you to see what the margins would have been if the average fee rate expected for the year had been applied.

The slight decrease in EBITDA as an absolute figure of course reflects the different business mix that we have in 2006 Q1 vis-à-vis 2005 Q1. Of course, as we mentioned, less contribution from Lotto and higher contribution from lower-margin business like [instants] and services, although they are also strongly performing as well.

If we now look at the net debt position, that improved from just about 90 million in '05 at the end of the year to 48.4 million at the end of March. Now that's of course [previous] distribution, so the situation is if ever going to change. Shares that will be [imported], of course, due to the net income recording in the first quarter of the year.

One other comment on the net debt figure, that the benefit comes from operating cash flow net of capital expenditures, which are about 14 million, one-four, in Q1. Eleven of that is due to the terminal replacement project, which has come to an end.

The shareholding structure hasn't changed, a slight dilution due to the exercise of stock options in Q1. Share price performance has been extremely good, especially after the announcement of the acquisition of GTECH, reflecting a we believe positive reaction of the market to the combination of Lottomatica and GTECH going forward. Over 38 million shares were traded over Q1, approximately 91% of the free float. At the end of March, the market cap was 3.2 billion. That's already history as it's currently higher than that.

If we now get to a few comments on the different segments and their performance. In Q1 '06, Lotto recorded revenues for 132 million and EBITDA for 101 million. That compares with 155 million in revenues and 122 million in EBITDA in '05. Instant tickets, revenue grew from - well, it effectively trebled from 10 million to 31 million and EBITDA performed even better, moving from 2.5 million to 18 million.

As to the gaming machines business, revenues also increased from 1.4 million to 2.5 million and the contribution at the EBITDA level of that business is now positive. Services revenues grew from 15.1 million to 19.4 million and EBITDA went from 8 million to 12 million.

Finally, the unallocated items recorded around 20 million in negative EBITDA, reflecting corporate overhead at the group level. We mentioned already the underlying business performance. Wagers for Lotto were around 2 billion, with 700 million of that due to late numbers, slightly lower than last year, but higher than 2004 in Q1. So overall a 15% decrease in wagers vis-à-vis '05, and a 4% increase in wagers vis-à-vis '04.

Instant ticket continues to perform very well. The overall gross ticket sales was 855 million, relative to 200 to 273 last year. The most important thing to mention here is that on top of the growth in the number of tickets sold, the average price continues to increase. In Q1, the average price per ticket was EUR2.4.

As for the revenues breakdown in the services business, scratch - sorry, top-ups continued to go very well. Revenues went up from 8.2 million to 9.2 million. The car road tax business is in line with last year. Stamp duties, we recorded 2.4 million. That continues to be a strong contribution from that new business.

The other services are more or less in line with past performance. The good news is, we recorded around EUR1 million in revenues coming from the utility bills payment service. In terms of contribution to growth in revenues, the overall story is very, very easily explained by 21 million in additional revenues coming from instant tickets, 4.3 million in additional business coming from the services business, some other items of minor entities, and 22.8 million in decrease in revenues, overall, 1.2 million in additional revenues from the different mix of business, right up until 2005 Q1.

The EBITDA contribution, Lotto - the contribution from Lotto decreased by 21 million. That was nearly offset by 15.5 million in additional EBITDA coming from the instant lotteries, 4 million just about from the services business and 0.5 million from the gaming machines business.

There were some other additional costs in the unallocated items that made up for the difference. If we then look at the consolidated income statement, in Q1 '06, revenues were 190 million, EBITDA, 112 million with a 58.8% margin. The depreciation line item increased from 10 to 18 million. That's effectively the combination of a normal growth in the deprecation coming from the current life cycle and investment cycle and 6 million in writedowns - or I should say write-offs - of the old terminals that were replaced and therefore are no longer in use.

Finally, financial charges increased from 2.9 million last year to 17.8 million. Now, that is not interest expense. There is a meaningful impact coming from the difference in [per] values of the optional hedging instruments that we entered into in January to protect ourselves against the risk of the U.S. dollar strengthening.

Now, as we decided to have a flexible hedging strategy, providing for [hot] upside in case the dollar was to weaken. That's what happened. The dollar has weakened and therefore the total value of the instrument has decreased, but that's good news on the front of having to expend less euros to buy the same dollars when we buy GTECH.

Net income for the group was 41.4 million, which compares with 61.7 million in Q1 '05, with a net income margin of just about 22%. Then look at the main event after March 31st. Two things need to be highlighted, perhaps. The first thing is the first hearing in the context of the Italian regulators' appeal against the arbitration ruling on the Lotto concession was held on April 20th. And the judges decided to hold the next hearing in January 2010, which I believe is very close to the 2012 expiree date that the Italian regulator insists the concession has.

Instant lotteries through interactive games is the other interesting good piece of news. The consultant with [inaudible] was authorized to carry out testing activities for instant lotteries' interactive wagering, and that's going to go through Lottomatica and its consortium investing in setting up the technology infrastructure for that to happen and test the new wagering through interactive channels for the next few months.

In terms of the financial results, Q1 financial results, that's it. I will spend a few words on the other resolutions that the board adopted today. First of all, as mentioned, the board approved pro forma fiscal year '05 financial accounts that basically reflect the impact of the combination of GTECH and Lottomatica as it had occurred in 2005 and all the impacts coming from the financing activities related to the acquisition.

Also, the board approved the issuance of 750 million in hybrid bonds. We're finalizing the preliminary work and we'll be able to launch in the next few days. We also - the board also approved a partner resolution allowing the execution of the senior [pacity] agreements, which after having I'd say very successfully syndicated the deal in the banking market will allow to execute and sign all the documentation.

The board also passed a resolution approving the content of the Italian prospectus for the equity rights offering for the international [offerings circular] relating to that and also for the international offerings circular for the hybrid bond. So we are effectively ready to go on the capital markets financing transactions as well.

Finally, the board approved the strategy of Lottomatica and GTECH going forward. This is a piece of information which is going to be contained in the marking documents and offering circulars, and was therefore approved and also released in today's press release.

That is it on my side. I would open up the discussion and if there is any question I will try and answer to the extent possible.

[OPERATOR INSTRUCTIONS].

The first question is from Mr. [Sharver Chad] of Bear Stearns. Please go ahead, sir.

Good afternoon. Could you give us some more details, perhaps, on the hybrid loan? You said it's a six-year maturity. Any put provisions or anything else you can help us out on that? Thank you.

Yes. I will be able to give a few comments on that, but I won't be able to cover much of the details of the terms and conditions of the proposed hybrid bond. It is going to be a six-year instrument, non-call 10, so it's going to be non-callable for the first 10 years. The bond is going to be deeply subordinated vis-à-vis the other [inaudible] and it will have some other features like interest deferred provisions and replacement languages that will allow it to be treated in a particular way by the rating agencies, allowing for the overall rating of the group to remain investment grade, which is our paramount goal.

I won't be able to give much else on this subject, as it's going to be the - the company will market the issuance of that bond in the very near future and therefore we are bound by publicity guidelines.

Right, so it's callable in 10 years with an no put provision?

Sorry, did you say callable in 10 years and ...

No put provisions?

No, there are no put provisions.

Okay, thank you.

You're welcome.

The next question is from Mr. [Franco Riva] of [Kaplan]. Please go ahead, sir.

Hi, good afternoon. I would like to ask [inaudible] about the recent award of a concession to manager license in Taiwan, which has been won by [Interlock] if I understand well, and if GTECH has been bidding also on that concession and why they have not been winning it, whether there is any particular feature which has been awarding the success to Interlock. Thank you.

Thank you. According to recent press release issued by GTECH, we understand that the Taiwan license was awarded to another vendor, in particular, as you mentioned, Interlock. I don't think I'm in a position to comment much more on this and, as you appreciate, we are in a very particular phase of our company history and in particular of the acquisition of GTECH, so it's not appropriate for me to comment on this.

Sure, thanks.

[OPERATOR INSTRUCTIONS].

The next question is from Mr. [Lavra Pamino] of [Intermodem]. Please go ahead, Madam.

Hello, I had just a question regarding Lottomatica. Do you think that - can you please explain what you think about the gaming sector, I mean, the sport betting in Italy and how would GTECH contribute to Lottomatica? And regarding the video lotteries, can you explain what would be the synergies for the Italian market with GTECH?

Yes. Thank you for your Lottomatica-related questions. On the first one, we have always signaled in a very explicit way that we are very interested in evaluating opportunities coming from the betting - the change or the potential change in the betting regulatory framework. Now, if that's the case and a new regulatory framework is proposed and new concessions are likely up for bid, we will evaluate whether to bid for them or not.

I'm not aware of a meaningful presence of GTECH in such sector, and hence I'm not in a position to evaluate any potential synergies coming from that. I would point out, though, that GTECH's capabilities in terms of system technologies and the ability to provide lottery wagering through different channels might be of good and great help on that.

The second question was in relation to VLTs. As you probably know, it's imminent the publication by the Italian regulator of the new VLT detailed regulation. We are not now in a position to assess whether that opportunity is going to be a meaningful or not opportunity. We believe it's going to be a meaningful opportunity.

If that is the case, of course, being GTECH, market leader in providing central systems and also having a meaningful presence in the VLT terminals business due to [Spelo] and prospectively also in the standalone slots business, due to the expected acquisition of [Maytronic], or at least 50% stake of it, we believe there's plenty of room for synergies coming from vertical integration. We of course will evaluate whether such synergies may be coming from potential [upward] synergies.

Okay, thank you. And just another thing, regarding the very good performance of the Lotto in Italy at the EBITDA level, what would you expect for EBITDA margin for the whole year?

Well, the first quarter, as you know, benefits from higher margin coming from the fact that our average fee is higher than the average - than the average fee that we will have for the whole year.

Yes.

So EBITDA margin will not be maintained as what it is now. However, the cost-savings program that we delivered over the course of the last few years will allow us to maintain very healthy margins on that business going forward. And I would probably expect margins to be in line with recent history.

Not greater?

I would probably expect margins to be in line with recent history. We have cut 111 or 114 million in fixed costs, well, in costs, in the last three years. I believe that over a cost structure of just about 300 million, that's a meaningful achievement. So there might be some room for further optimization, but I wouldn't expect that to be great.

Okay, thank you.

You're welcome.

Next question is from [Thomas Regal] of [Fallow Capital]. Please go ahead, sir.

Hi, thank you very much for taking my question. If you could please give us any color on the U.S. state approvals necessary for the GTECH acquisition and in terms of timing or any anticipated problems.

Thanks for your question. I think that in terms of timing and the expected timing of closing of the acquisition, there is no meaningful news to talk about. The approvals process is well underway. We don't anticipate any issue, but of course we don't control that process, so we can't guarantee the timing that we expect is the likely one. So, relative to what we've said so far, we think the timing is going to be in line with expectations.

Okay, thank you.

The next question is from Mr. [Dominico Giloti] of [Aromobiliare]. Please go ahead, sir.

Good afternoon. I have a question on scratch cards. I would like to understand how the current development of the business compares with your business assumptions for last year's business plan assumptions, in terms of volumes and also in terms of costs?

Thank you, Dominico. Well, the success of the new scratch and win lotteries beat our own expectations and therefore, in terms of volume of tickets sold, we're doing a greater job that we projected and that we thought that we would be able to deliver.

I think that's due to a successful recipe that we discussed several times. The margin of that business is also better than expected, because we've got a few reasons, but mainly because of the interesting mix of tickets we're selling, where the more highly priced tickets are performing very well and therefore are increasing the average price per ticket.

Now, that is, of course, revenues with no costs attached to and hence that increases the margins on that business. Now, I've always sort of signaled that the long-term margins of the business should be - one should expect it to be lower than online lotteries and in particular Lotto, and to be in the range of 22 to 25%.

Now, we are definitely at a much better level, and the most important reason is the one I mentioned. I would warn you, though, that in Q1 we also incurred very limited advertising expenditures and therefore margins benefited from that as well. The other possible reason to point out for this great performance is that our distribution network is more sort of concentrated and therefore the logistics cost is also less - the impact of that is less meaningful than we thought.

Overall, this is the situation, so the performance is great. It's not going to be as great when we incur normalized advertising expenditures, but it's going to be healthier than the one that we discussed in the past.

Thank you.

The next question is from Mr. Scott [Melman] of Jefferies. Please go ahead, sir.

Thank you for taking my question. Has the United Kingdom given you any indication of when they will rule on the change of control regarding GTECH?

I'm afraid I cannot answer that question.

Okay, thank you very much.

The next question is from Mr. [Michael Takriti] of ABN Amro. Please go ahead, sir.

Hi, good evening. I wanted to ask a couple of questions. Firstly, on scratch and win, has the success of scratch and win in any way cannibalized your receipts from the traditional Lotto concession? Can you identify that and can you quantify it in any way? And the other question I wanted to ask is I didn't quite understand your concept on test marketing interactive lotteries. Could you give us a bit more color about what precisely you mean by interactive lotteries and when the test marketing ill commence?

Yes. I guess on your first question, we don't have any evidence of the scratch and win lotteries cannibalizing Lotto. In all truth, we should also point out that the pattern of the Lotto wagers in the last, say, two years has been so particular that it's very difficult to draw any conclusion on that. But we do not believe that there should be meaningful cannibalization from instants, because the type of player is different. The reasons for play is different, and therefore we have no concerns about that.

The instant tickets are very much an impulse play while the Lotto has got a very loyal sort of customer base when it comes to the core base of wagers, less so on the - it's much difficult to comment on the late numbers phenomenon, but that's brought on by the division. But I wouldn't expect there to be any meaningful cannibalization, nor do we have any evidence of that in the recent performance of the two businesses.

I guess your second question was on instant lotteries through the new interactive channels. Well, as provided for by the 2006 budget law, the Italian regulator intends to on one side challenge and fight against illegal Internet wagering, and on the other side provide new channels for people to play through.

The testing activity for the instant is about to start. We, as concessionaires, have been awarded that task and we will set up the technology infrastructure that will allow that to happen. I don't think there's much else to say as this is really going to be a testing phase and we will see how that goes and we are confident that there's going to be a good reception from the consumer.

Okay, thank you.

[OPERATOR INSTRUCTIONS].

The next question is from Mr. [Oriana Basineli] of [Cayhosa]. Please go ahead, Madam.

Good evening to everybody. I would like to go through the results for the combined entity figures, because I haven't time to read all the adjustments you made, so please [inaudible] comment at all of this combined entity for 2005. And the second question is a follow-up of the directory question. If you would please elaborate a little more on the potential, let's say implication coming from the [new low]. Thanks.

Yes. I will answer the second one first, as it's easier. The VLTs basically - the 2006 law already provided for a different set of rules to be applied to the machines to begin with. That's going to start as of July 1st, I believe, and on top of that it is expected that the regulator will issue detailed regulation on video lottery terminals, and it's difficult for us to comment on that opportunity, as we don't know the rules yet.

The market potentially is of course great. But it's also going to depend on the type of distribution, where such terminals will be allowed to be installed, the rules of engagement in terms of the guys operating along the value chain and so on and so forth. So too many uncertain items that will have to play a role in setting up the profitability and distribution of value along the value chain.

So in the case of potential working, you are more interested to the supply of terminals or also to ...

No, no, let me make something clear. The VLT business is going to flow through the existing concessions, so Lottomatica is one of the gaming machines concessionaires.

Yes, out of the 10.

Yes. We will not have to do anything, because when the new regulation is in place, we will be able to operate the business. Now, [seven] terminals is a different business. I think we will definitely benefit from vertical integration with the acquisition of GTECH. I'm not sure I am in a position to enter into any discussion into whether we are going to sell terminals to ...

In Italy, okay.

To potential competitors in Italy. That doesn't seem to be the right subject, anyway.

In terms of the pro formas, I think the easiest way for you to is to go through the detailed press release that we issued. I will point out a few things just to help the readers, so to speak. The pro formas were built such that the 2005 IFRS Lottomatica numbers and the 2005 special purpose IFRS GTECH numbers on a calendarized basis were put together.

Okay, but it's a strong - there's a quarterly effect on GTECH figures?

Well, I wouldn't characterize that as a strong impact, but there may be some, yes.

The adjustment, the pro forma adjustment, reflects the first of all purchase price allocation, secondly, the financings and mainly the costs related to the financing transaction. So you will see the impact of us raising 1.4 billion in new equity, the impact of us raising 750 million in hybrid bonds, the impact of the group entering into a $2.26 billion senior bank facility and, on top of that, of course, all the related costs. As it's a very detailed press release, you will find some very interesting material to dig into.

Okay, just a quick comment on the assumption on interest rate and tax rate from the combined entity, if it is possible and if these estimates are reliable for the coming years.

Well, as you know, pro forma adjustments are made to reflect the pro forma impact of the transaction as if it had occurred in the past. Now, that's not necessarily a good indication from what the company will be year over year or what the impact of the pro forma adjustment will be in the future. Having said that, which is some sort of language that a lawyer would suggest that I use, I think that there's no particular information that I can give you in terms of the interest rate.

I will only say that the blended cost of the capital structure is such that we will incur - sorry, we would have incurred 161 million in additional interest expense.

Okay.

If you divide that by the combination of debt financing instruments, you will get to some sort of number, which is going to be the blended rate. I won't give you any further indication on the interest rate, because otherwise I would incur the marketing activities that we will have to go through for the hybrid bond issuance.

Okay, perfect, and something to point out in terms of tax rate?

There should be no meaningful or material difference in the tax rate of the two entities going forward.

Okay, perfect. Thanks.

I should probably correct myself. There should be no impact to what the tax rate would have been had the acquisition gone through last year. Now, as to forward-looking statements, I would not make any forward-looking statements.

The next question is from Mr. Michael Takriti of ABN Amro. Please go ahead, sir.

Yes, hello again. Just on the pro forma account you presented in the statement. Do these include the 80 million to EUR100 million of cost savings that were identified in the acquisition, or are those cost savings additional to what we see in the pro forma?

I have two answers to your single question. The first one is we did not identify any such synergies or cost savings amount, but rather the cumulative impact over a five-year period of the savings that we expect to have. But it's not a one-year recurring benefit. And that's not even all to be recognized in the income statement, because a part of that is the cumulative impact at the capital expenses level.

So if you go through the presentation, we discussed back in January that's going to be more clear, probably.

As to the pro forma question, no. The pro forma does not reflect any potential synergy. You just add up the two financials and reflect the impact of the purchase price allocation and the financing related to the acquisition.

Okay, so, for example, the most obvious cost saving on not having a listing in the USA for GTECH is not reflected in these pro forma accounts?

No. The 2005 current year IFRS GTECH financials are exactly the standalone accounts for GTECH for the relevant period, has been accounted for all material costs, revenues offsets and liabilities.

Okay, that's clear. Thank you.

You're welcome.

[OPERATOR INSTRUCTIONS].

There are no more questions at this time.

Very well. Thank you, everybody, for attending this Q1 conference call and I do apologize, once again, for us postponing the call, first, and being late, secondly. I hope the information in the press release is going to be clear. If it's not, feel free to call either myself or [Simon d'Augustine], our investor relations. Thank you. Bye-bye.

Ladies and gentlemen. Thank you for joining. The conference is now over. You may disconnect your telephone.